Q3 2020 Potbelly Corp Earnings Call
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Okay, and the least negotiation effort that we outlined for you and our last two quarters.
Program has been highly successful and we're nearing the end of the process.
He's gonna touch on it in more detail, but from a big picture perspective, we're lowering are expected permanent closures to just 25 to 30 shops, and we've renegotiated 280 leases as of early November.
Like not only to thank the team that helped drive this important initiative, but also thank our landlords and their support we look forward to growing together as we move forward.
Now, let's turn to slide for.
With the business on a more solid footing, we're taking steps to build on our pandemic response with a focus on executing our turnaround and returning to growth.
Highlight our new points based perks program.
Yes, we are moving forward with a corporate restructuring to put potbelly on a stronger path a profitable growth in the future.
Asked few months and as I sit here today I have full confidence in our team and our strategic plan to restore potbelly to growth as we exit this pandemic.
Alright and.
And that's our volume performance.
Sales volume levels have been steadily improving without the support of R. C V D an airport locations.
Which demonstrates the success of are off premise and perch loyalty program initiatives.
We are encouraged by these trends and believe that they are building consistent consumer behavior that will continue beyond the pandemic.
Shop sales last quarter.
The stability of Cogs as a percent of revenue was primarily the result of minimal mix changes quarter to quarter.
Labor expenses were $25.8 million in the third quarter were 35.8% of shop sales compared to $21.9 million or 39.2% in the previous quarter.
This was primarily driven by improved sales leverage in certain labor related costs not directly variable with sales.
Occupancy expenses were $13.9 million in the third quarter or 19.3% of shop sales.
Compared to $14.7 million or 26.2% in the second quarter, primarily driven by improved sales leverage and reduced expenses come close shops.
Other expenses were $12.1 million in the third quarter or 16.8% of shop sales.
Compared to $11.0 million or 19.7% in the prior quarter.
The decrease was attributable to improved sales leverage and operating expense items, such as utilities and other expenses not directly variable sales.
Cash and now profitability our key priorities.
We responded to the pandemic disruption to our business by aggressively managing costs to preserve cash.
Our cash burn rate in Q3 was $366000 per week.
8.5% at which point, we expect to be profitable at the enterprise level on an adjusted EBITDA basis.
As we look to the future, we will balance topline growth with a culture focused on cost discipline and driving efficiencies.
As Bob previously mentioned, we will be reorganizing and restructuring our corporate team to put potbelly on a strong path to profitable growth in the future.
These actions take our previously announced.
Nobody related cost reduction efforts a step further.
These will be fundamental changes in the way, we do business and.
And fundamental changes to our cost structure.
We are now looking to make ourselves one of the more effective and efficient operators in our space and our work is underway.
These actions will start taking place from November through the end of the year.
We expect to achieve between $3.5 million to $4 million in DNA savings on a run rate basis as we enter 2020 one.
The cost to achieve this work are expected to impact the fourth quarter and should range between $1.5 million to $2 million.
We also wanted to provide more detail on our lease negotiation. So please turn to slide seven.
As of this week, we have successfully renegotiated 280 leases with our landlords and we have been pleased with the nature of those discussions.
We have reduced our expected permanent shop closures to 25 to 30 much lower than the initial 100, we forecasted.
The termination fees that we have incurred to date have totaled roughly $2 million and we expect to incur approximately $3 million of termination fees in total.
However, the benefits from lease abatements restructuring savings and shock loss total more than 15 million on a go forward basis the.
Then, Arkansas they did the same store sales.
Turning to slide nine you can see that diamond has recovered a decent portion of what the pandemic eroded as dine industry. He's in the third quarter.
That said approximately half of our revenue today is off premise. This compares with roughly 30% of our revenue on premise prior to the pandemic.
While we could have never forecasted the events that unfolded this year.
This shifted mix as a validation of many of the investments we've made a 2019 to build our digital foundation.
These include updates to our App expanded partnerships with all the major third party platforms.
Mobile pick up.
And curbside.
It's important to note.
That will half of our business is not off premise almost three quarters of our sales have our customers crossing the threshold of our physical shops, the dining carry out will pick up a mobile order.
With this in mind the unique design environment of our shops will continue to be critical horse going forward.
And Q2, we launched several new initiatives to bring our loyal customers back and to attract new ones.
These efforts included Potbelly pantry family meal deals and curbside pick up.
These initiatives remain popular with our customers as they address customer needs that had been amplified during the pandemic.
We're also continuing to explore a number of other ideas related to our strategic pillars, and they'll have more specifics to share during our queue for a call.
With that I'll pass things back over to Bob.
Thanks, Steve Please turn to slide 10 is I'd like to give you a few insights into our brand physician and the pillars of our strategic plan.
Before I do I want to be clear that our team has worked very hard this quarter and we've developed a comprehensive plan inclusive of a focus set of strategic initiatives to drive the business.
We're already activating and testing many of these initiatives in the fourth quarter, others would be activated throughout 2021.
But.
We have work to do that needs to be completed before we're ready to outline that level of strategic initiative detail. So on our next earnings call will do a much deeper dive into all of these elements.
Today, I'll discuss our brand position.
And the strategic framework that supports it.
We're fortunate to possess a tremendous brand as evidenced by a set of loyal customers that just keep coming back to potbelly.
But there's more that we can do to reinvigorate and better leverage our branch expand its reach and continue to build even stronger connections with our customers across the country.
With that in mind as you see on this page we've honed in an improved on our brand position Potbelly is the sandwich shop with the craveable quality and Goodbye have a first class Scott.
Potbelly is a powerful brand and we believe this statement declares just how special we are and more importantly, what makes us so.
We're not a sandwich shop, where the sandwich shop with a focus on craveable quality food reflected in our exciting flavors are ingredients and our preparation.
Customers love the good mood vibes I get from a potbelly visit even those digital visits.
Just something special about a place that is so authentic uncomfortable while at the same time, taking great care with our toasted sandwiches hand, dip shakes and fresh baked cookies.
I'd like to close on slide 11, with our strategic focus on traffic driven profitability.
Profitability drives growth at the unit level and the enterprise level and it drives value for all our stakeholders, including our franchisees.
Topline same shop sales growth driven by incremental customer traffic is the healthiest way possible to expand profitability in the restaurant business. This simple focus statement unifies our entire company a single minded go.
And these five strategic pillars will serve as the core of our company and brand as well as the foundation for corporate strategy.
The first pillar is craveable quality food at a great value Potbelly offers the most craveable quality sandwiches soups salads and desserts in fast casual with quality in every ingredient expert handmade preparation and surprising value across the menu.
Our food is why our customers come to potbelly and why they come back again and again.
The second pillar people, creating goodbyes.
Is focused on the heart of what makes a potbelly a unique experience or people.
Potbelly is the home for people with personality that enjoy serving our customers. Our team members care about one another every aspect of our food and ensuring our customers feel the goodbye every time they come to pot belly.
We embrace our higher for attitude and trained for skills mantra to bring in people, who offer those goodbyes and a lot of great food.
Third is customer experiences that drive traffic growth.
Returns to growth in the fast casual space.
I'm truly excited to share our future success with each of you and I appreciate all of your support for properly.
With that I will now turn the call back over to the operator, so we can address your questions operator.
Thank you congrats.
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John Joshua long with Piper Sandler. Please proceed with your question.
Advertising that we're doing that we mentioned another couple of comments, we've done that to markets, where now testing and a third we're we're getting that four to one return that is more of a broad based awareness campaign that is geared towards driving that awareness and connection and then converting those connections to traffic so that.
That funnel, you mentioned, where we're playing in the low part of that funnel because we have done traditionally so little advertising were able to communicate with the the types of of potbelly friendly users or lapsed users because of what we know from her perch program.
And then capture them using the social media digital that we we can take advantage of and convert that into traffic. So we've seen success with that we we feel like we've got some more work to do before that's the significant part of of what we we embed into the ongoing plan, but early stage results.
Are very positive you know four to one that works for US all day long at least as long as you're in the bottom of that photo.
That's very helpful. Thank you for that and when we're thinking about the top line trend obviously, there's a lot of pieces to the to the story into the recovery into longterm opportunity, but taking just the top line piece that you talked about on the call and provided a lot of great data on with trends leveling off here improving Taliban <unk>.
Off here into <unk>, what do you think about as that next kind of inflection point or piece of the either story or environment that that needs to change to really see that trajectory start kicking back up towards that down 8.5% that Steve highlighted for being profitable at the enterprise level is that.
Solely based on initiatives is that a mix of initiatives and capacity just how how're you thinking about that and and positioning the brand and your team's going forward and to 2021.
Well I think it starts with you know just a a very unifying focus as we said in that strategic plan on traffic driven profitability and you know there. There certainly are initiatives it will be talking about in fourth quarter that go straight to the heart of that and we've mentioned a couple of them already on the call today digitally driven.
Using that we're doing as well as what we can do with our perks programs Adam noise coming on board is our senior operations later at the C. O O position, here's a seasoned operator that understands just how powerful great operations can be for driving <unk>.
Additional sales so while our sales are down from last year. It doesn't mean that we're we're seeing pick business at lunch, where <unk> are shops that have dinner business are seeing that business flow through and.
And our ability to pick up that speed and take advantage of driving those sales the way that we can when we own it you're you're gonna think of things in that world that ops world like focusing on drive thru speed of service times in line times cleaning up streamlining and simplifying the operations line as best we can.
And then you know even the the comments about resetting the dining room and cleaning up the dining room, you know I think a lot of restaurants or stepped into this pandemic. We're.
Almost in a a bit of a retraction mode and we are on our front foot. We went through and reset every single dining room that we have cleaned it and reset it and made the shops feel more welcome than they have in months.
So even if someone's coming in to pick up their food, it's an energetic environment and it's and it's a great service experience where they come back.
You know a little bit I mentioned in my comments, a little bit of early testing of hours expansion again at the beginning of the pandemic what was done to preserve cash flow and and do all we could to to put our brand in survival mode. We're not waiting for the economy to bring back that that sales at full <unk>.
Force, we're taking control of what we can and we've seen some good early signs with those hours of operations expansions closer to normal or back to normal and we're gonna continue to look to do that more where we can.
And and then finally, you know looking at ensuring that all of our peoples.
Incentives that they're driving towards even even to the point that you're looking at incentives in the in the field, we want to make sure that people understand driving top line, where we can is is the most important thing we can focus on look you.
Yeah. This stuff that we're seeing in the news with the peaks with Covid with you know the the dining rooms that are being closed that we're going to deal with that and I think we've proven that we can deal with that and the ups and downs of those peaks and valleys, even since the beginning of the pandemic and continue to move our sales numbers up into the right.
We also have seen last thing I'll say about this we've also seen the customers adopt a much more flexible behavior as well and I think that's really important here.
In states like Illinois, where in in shop dining is not allowed right now because of some of the peaks in cases.
We have seen people continue to come in because that doesn't mean, our doors are closed. It just means that you can't sit down at the table and enjoy that sandwich or that milkshake.
But they're coming in they're picking them up they're going through the line with their masks on and we're seeing people sitting in their cars eating their food going outside finding a place that they can sit with friends. So customers have become more flexible which means we're able to continue to hold onto that business look as I've said it a couple of times and my response to your question, but this is this is a team.
That is driving topline not just waiting for it to come to us.
Understood and following on that point.
Driving the top line you see that nice improvement, especially coming out of April knows how how would you queue up or dimensionalize. Some of the profitability initiatives that you've put in place in terms of restaurant level profit turning getting the profitable territory in September increasing into October and then if we could quantify that to some level that would be.
Be helpful. And then how do we think about that with being balanced against some of the layering in of what I imagine, they're gonna be incremental costs in terms of expanding hours and maybe on the labor side or a pieces as we tried to get the overall business back to normal is is there flexibility in there to still maintain those profitable levels at the at the shop level even.
Say flattening or longer term opportunities for Sam store sales improvements.
Well I think you've heard Steve say that and I'll, let him speak to any of the numbers, we want to we want to get into very very deeply but <unk>. The answer is we won't drive that top line at the expense of the profitability. That's why that's that strategic focus that it is and so you know a couple of things.
Then with a new C O O that has the experience and and high volume two S are that Adam does.
You know you can deploy labor more efficiently and at the same time put more of the right people in the right place at the right time to be able to handle that business. So you get the leverage and you'll get the efficiency that goes with it.
And we're turning over every stone every every place at the shop level and above that we are investing money, that's not getting us a return in terms of customer satisfaction or traffic growth. We're looking to see what we can do to to economize on that.
And even with those hours of expansion, we only do that where it's profitable expansion and that's you know. This is this has been around the restaurant business for a long time, if you're opening.
With restricted hours because of the pandemic and you'll see that your your opening and closing hours are well above breakeven numbers you start looking at the shoulder hour on either side of that and and the likelihood is that you can extend back into what was normal and stay above breakeven there too and.
And you know what we call as operators of shoulder hours those continue to build as well. We're seeing you know an effort by our teams to to get out in the marketplace and where people are coming back are we able to push delivery, we're able to push order digital ordering that can be picked up and even some incremental improvement in our catering business.
For those that are getting back into the market.
And the sooner we get out there and connect with them the sooner they'll start using our shops for their lunch their lunch experiences.
And hey, if we're working on catering orders in the morning, There's no reason, we can't unlocked the doors and be ready for those customers would walk into so no. We we would not drive this at the expense of that shop level profitability, because that's the source of our our enterprise level success.
Success.
Yeah, I would just add to that and we saw great margin expansion in the quarter to versus border three timeframe right. We were we were down almost 14% in terms of our shop margin and and we got to negative one half of one per cent we expected.
Continue to move that in the positive direction that we started with in September that you've already seen it in October and we continue to move and yeah, certainly the the increase sales leverage helps us on that margin line, but that's Bob alluded to you know there's been a lot of activity and a lot of work on tuning the labor right and.
Expect more as we go ahead I'm gets a chance to really kind of think his teeth into the into the shops and so we've we've already experienced some of that benefit here as well and and even as some some expenses have crept back like you know two three is a big is a big quarter for utility costs right as an air conditioners run and and those sorts of things, but you know.
Even even with some of those added cost of of that an opening up temporary clothes shops, and retraining, some folks and getting you know new uniforms for them and so forth. Those added cost. We we've you know the the scale of the business and the increase sales helps us outrun that so once we get through <unk>, even some of those you know things.
That aren't typical in your run rate, we would expect that that all helps then I'll helps the margin side. So we're we're optimistic on that and we're gonna be obviously continue to watch it incredibly closely but it's going to be the foundation of our turnaround is starting to bring <unk> back to profitability then.
Then we moved to the enterprise level and so there's momentum behind this and we're gonna keep pushing.
Great. Thank you.
Yeah.
Thank you.
That's a reminder to register for a question you May pass the one for.
Our next question comes from match Curtis with William Blair. Please preceded your question.
Hi, good afternoon, and thanks for taking the question just to stick with some margin related items to clarify the response to the last question I mean, <unk> <unk> given the comp run right. When it was on October sort of negative high teams. What do you think the restaurant level margin would be.
I mean based on the response to just get it sounds like.
Modestly positive is the answer but I just wanted to clarify.
In terms of the the go forward quarter.
Yeah, that's correct.
I would say I can't give you an exact number but yeah, we would expect to be in the in the low to mid single digits as it relates to our margin expansion next year I mean next quarter.
Okay, that's great and then I guess a separate question uhm.
With Chicago.
Being closed for indoor dining as well as I said I think nearly the whole state at this point, how how much of a revenue penalty you do think there's gonna be to your business either in terms of lost revenue per week or or how are you think about it <unk> cause I mean, I I'd imagine you'd be able to recapture some of this through the digital channels, let's just curious as.
To what extent should be able to do that.
Sure.
We we've been.
Go ahead go ahead Bob.
Yeah, I will I'll just say this quickly and then let Bob go but we thought you know this is just just happened in the last couple of weeks in some of the outlying counties around Chicago and just happened in Cook County, which is where Chicago is you know over the past week and so it was obviously watched it pretty closely and and we have not yet seen you know a a.
A big drop in sales because the dining rooms are closed because it as Bob mentioned, there's there's certainly some resiliency in the in the customer base in terms of their ability to kind of move between channels to get get their potbelly sandwich and they can still come in to the shop and have a sandwich brought out and eat it in their car taken.
Home and or have it delivered or or pick it up and and you know bring it to wherever they wherever they are gonna consume it. So we we all watch watch it closely but so far we haven't seen we haven't seen a big shift with with that with the dining orders being heavily restricted in Illinois.
Okay, Great and then last question for me I guess now that you know looking in the years ahead and a unit development would be more focused on the franchise side I was wondering if the franchisees you're talking to are looking to have a new restaurant image and.
<unk> I mean, I know the part of management team working on the store future and you know parts of that May have worked and others may need some retooling, but I was just wondering what your thoughts are on the store future or whatever iteration you you prefer to think of going forward.
Yeah look there's no question that the franchises are gonna be keenly interested in in the you know the facility itself for two reasons. One is there you know.
Well aware of what those returns are are required in order for to for them to make sense out of the investment that they're putting in there.
But you know the best kind of franchisees are the ones, who who really loved the brand that they're franchising and they've got a lot of passion for how that how that restaurant looks appeals to consumer and how it operates the store the future shop in the future was had had three primary objectives attached to it when that project was undertaken it was to reduce the investor.
It costs.
On on the standard Potbelly build it was to reduce the operating costs and and do that while I'm, making the operation more efficient for the consumer and to really build on them bring out the best of the brand and we've object objectively assess that it actually wasn't successful in any of those three and so you were.
See any more shops for the future being built in our system.
Now that does not mean that we don't want to actually we plan to modernize and an update our shop design and so that we can refresh our aging <unk> all restaurants are always aging or we've got to make sure that we've got a plan to keep them refreshed and keep them up to date.
And to optimize the shop for the new Bill. So there there will be and we have already made some some I would say more nimble adjustments to the last couple of shots should've been built in the franchise population with some success there too.
And and I think that we are still focused on those same three objectives, but we're going to make sure that we're successful at all three of them.
Okay I appreciate the type of thanks very much guys.
Yeah. Thanks.
That's all the time, we have allotted for questions today, Oh now passed to call back to Bob for a closing remarks.
Okay, well, thank you and thanks again, everyone for your time today and your continued support as we've discussed we've we've had a great opportunity to build true growth engine here a potbelly in the future and we look forward to shifting gears from this is pandemic driven response that we're in the middle of to continue or turn around and growth in the near future.
We are the sandwich shop, with the craveable quality and goodbyes of a first class dive and we're excited to share that experience with new customers and are loyal followers for years to come have a great evening everyone.
That does conclude the conference call for today. Thank you once again for your participation and ask that you. Please disconnect your line.
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